Parliamentary Pensions (Hansard, 28 June 1991)

§ Mr. MacGregor

In my letter of 4 February to the chairman of the Top Salaries Review Body, I invited the TSRB to review a number of aspects of the parliamentary pension scheme, including the balance between the Exchequer and Member contributions, the role of the Government Actuary and the rate of accrual. The TSRB has in consequence conducted a wide ranging review of the financing of the scheme. Its report has been published today and a copy has been placed in the Library of the House. Copies are also available in the Vote Office. I would like to thank the review body most warmly for the speed and thoroughness with which they have produced their report.

The TSRB have recommended that

(a) there should not be a switch to a fixed ratio between the Exchequer and Member contributions to the parliamentary contributory pension fund and the balance of cost method should be retained for determining the level of the Exchequer contribution;
(b) the Government Actuary should continue to be responsible for reviewing the financial position of the fund every three years and, as provided in the Parliamentary and Other Pensions Act 1987, for recommending the balance of cost contribution required from the Exchequer;
(c) because there is at present no adequate system for reviewing the parliamentary pension scheme and the Trustees' role is essentially fiduciary, the TSRB should review the pension scheme on a regular basis at the time of the Government Actuary's triennial valuations;
(d) in line with their finding that only 4 per cent. of occupational pension schemes have an employee contribution in excess of 7 per cent., which demonstrates that the Members' contribution has been seriously out of line with practice elsewhere in the public and private sectors, the Members' contribution rate should be reduced from the existing rate of 9 per cent. to 6 per cent. of salary;
(e) the accrual rate introduced in 1983 should remain at a fiftieth of final salary for each year of service;
(f) this accrual rate of fiftieths should be applied to all —ie including pre-1983—service for currently sitting MPs in respect of their future pension entitlement, with appropriate augmentation for those who have been making up the shortfall voluntarily;
(g) pensions for surviving spouses should not be improved further from the present level of five-eighths of the Member's pension;
(h) the existing complex enhancement rules should be replaced by the grant of full years of potential pensionable employment to age 65 for the calculation of ill-health retirement pensions and of spouses' pensions when MPs die in service;
(i) in respect of former MPs who die during the first five years of retirement, a Member's pension should continue to be paid to the surviving spouse for the remainder of the five years after retirement, followed thereafter by the dependant's entitlement;
(j) these changes should apply also to the supplementary scheme for Ministers and other paid office holders.

The Government propose to accept all these recommendations except the backdating of the faster rate of accrual introduced in 1983—recommendation (f). Given that Members have already had an opportunity to purchase added years at the higher rate of accrual—and that many Members have taken this opportunity—we do not believe that a retrospective change of this kind is justified.

The Government Actuary's valuation report on the parliamentary contribution pension fund is today being laid before the House, in accordance with section 3 of the Parliamentary and other Pensions Act 1987.

The valuation (as at April 1990) estimates that the long run total cost of the scheme—leaving aside surpluses and deficits—is 23 per cent. of salary. This compares with the valuation at April 1987 when the total cost of the scheme was estimated at 20 per cent. The higher total cost of the scheme reflects the substantial benefit improvements—principally the increased widows' pension—made by Regulations laid in March.

Under existing legislation, the Exchequer contribution is determined by the balance of cost after taking account of the Member contribution. As I have explained, the TSRB have recommended, and the Government accept, that this system should continue unchanged. Accordingly, if the Member contribution remained at its present level of 9 per cent., the Exchequer contribution following the latest valuation would be 14 per cent., as against 11 per cent. at present. But as the House is aware, the actual Exchequer contribution since April 1989 has been lower, because the 578W previous valuation (as at April 1989) showed a surplus in the Fund: as a result the actual contribution paid by the Exchequer since April 1989 has been 4.4 per cent.

There continues to be a surplus in the fund and the Actuary has therefore recommended that the actual Exchequer contribution should fall to 2.8 per cent. until 2000, when it would need to rise to the long run standard rate of 14 per cent. Under the 1987 Act, this recommendation would not come into effect until April 1992. However the TSRB's recommendations, which the Government propose to accept, will significantly alter the position.

The Government propose that the reduction in the Member contribution from 9 per cent. to 6 per cent. should also take effect from next April: this correspondingly increases the Exchequer contribution by 3 per cent. The recommended improvements in the death and ill-health benefits, which we also propose to accept, will increase the long run total cost of the scheme by I per cent., to 24 per cent. of salary. Since these improvements are being accepted by the Government without changing the Member contribution, the Exchequer contribution will also rise by a further 1 per cent. As a result, the long term cost payable by the Exchequer—leaving aside surpluses or deficits—will be 18 per cent., against a Member contribution of 6 per cent., and the actual Exchequer contribution, taking the present surplus into account, will be 6.8 per cent.

As required by section 2 of the Parliamentary and Other Pensions Act 1987, I will be consulting about these changes with the Trustees of the scheme and other interested parties. I then intend to allow the House to debate both the GAD and TSRB reports before the summer recess.